The best explanation of the mortgage crises so far………………..

The best explanation of the mortgage crises so far………………..

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager at the bank (subsequently, of course, fired due his negativity) decides that the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.

The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.

Finally an explanation I understand...

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Another great point is that non-drinkers are driven to drink after seeing how the drinkers are being bailed out. And, drinkers outside that bar are driven to drink inside that bar once the terms of their inebriation improve in there.

At any rate, the scale of the bar, the drinkers, the bank, the supply companies, and finally the government, mean that the AlcoCrash is now so large that a Great Prohibition has resulted. So much drinking has stopped that getting drunk again is very difficult. For example, there are fewer bars, and they want you to pay for your drinks up front again, and you're short on cash due to being laid off from your job at the beer delivery company.

But I think the "most of whom are unemployed alcoholics" places a bit too much blame on the struggling homeowners.

One important point to remember about the "unemployed alcoholics" (upside-down homeowners): the imploding real estate values are not the fault of any single homeowner. Some of the people going into foreclosure are getting screwed because their equity shrank due to falling appraised value, which kicks in some unanticipated contractual consequences. In addition, if people fell behind on mortgage payments in the past but had decent equity, they could always apply for an equity loan to cover short-term cash crunches like a layoff.

Remember too that many cash-strapped lenders are working overtime to zap people who cross 30- or 60-day barriers, milestones that in better economic times likely would have not triggered draconian bank default and foreclosures procedures so instantaneously.

Finally, can we actually blame some folks from walking away from upside-down properties? What is the incentive for someone in foreclosure whose home is 20K or more in negative equity? They come to the rational conclusion that they are paying for a property that they cannot make money on in the foreseeable future, and they logically conclude that renting an apartment or house at 1/2 to 2/3 of their current monthly payment makes a lot of sense.

I do agree that there are sub-prime mortgages that never should have been written, but these "unemployed alcoholics" are not necessarily a bunch of people overburdened by and addicted to credit. Some of them have lower incomes, some have old poor credit histories that have improved, while others struggled with unemployment or health issues that caused them to fall behind in the past.

Ultimately the decision to issue the loans lies with the lenders. Let's at least make Heidi and her banking cohorts a bunch of drunken fools, too. Drunk with heady profits that cannot possibly last forever, that is.

«Some of the people going into foreclosure are getting screwed because their equity shrank due to falling appraised value, which kicks in some unanticipated contractual consequences.»

Why are they getting screwed by equity shrinkage? They agreed to meet the payments.

«In addition, if people fell behind on mortgage payments in the past but had decent equity, they could always apply for an equity loan to cover short-term cash crunches like a layoff.»

This is why they are to blame. You're SUPPOSED to keep 2-years-worth of your wages or salary in reasonably liquid form in case of personal catastrophes like unemployment. That's the standard rule. And around Toledo -- where unemployment lasts a lot longer than in other areas that are prosperous -- then that metric should grow, not shrink. Toledoans should commonly have 3-4 years of gross income salted away. Toledoans should be HUGE savers ... at least, those who don't spend most of their time being drunk, stoned or stupid.

Simply put: Counting on some bank policy or market asset to save your stupid ass is NOT SANE ECONOMIC BEHAVIOR.

«I do agree that there are sub-prime mortgages that never should have been written, but these "unemployed alcoholics" are not necessarily a bunch of people overburdened by and addicted to credit. Some of them have lower incomes, some have old poor credit histories that have improved, while others struggled with unemployment or health issues that caused them to fall behind in the past.»

Then they should never have tried to become homeDEBTors. Period.

Mike, I'm one of those people. So I didn't get any financing for my purchase. No, Mike, I waited out the period of housing bubble and then when it crashed, I used my SAVINGS to become a homeOWNer. You could say I took out a 100% loan from the First National Bank of Guestzero. And ALL that I heard during my rental period was how FOOLISH and STUPID and IMMATURE that I was being.

So FUCK these foreclosed assholes. Despite peer pressure and outright cultural propaganda, you are STILL responsible for knowing what's the financially correct choice. Around Toledo, taking on a mortgage for the average $150K house was ONLY for people with secure jobs, like health-care professionals, law enforcement, government, and the mid-to-high-level management class. EVERYONE ELSE should have rented as cheaply as possible and SAVED. The onus for saving for a future capital expense is ALWAYS yours.

I'm gonna scream if I hear one more person whine that they are going to lose "their" home due to a loss of income. If it was "your" house to begin with, you would NOT BE MAKING A MORTGAGE PAYMENT.

And what really chaps my hide is seeing all these news stories that completely gloss over the HELOC issue. People cashed out their equity to spend foolishly, and the reporters are too busy writing it all up as a "sob story" that they don't even notice the glaring inconsistency of somebody who took out an (for instance) $80K mortgage 15 years ago and who owes $120K on it now. HELOC queens!

The only problem with renting is when you can't admit it. And way, WAAAYYYYYYY too many of these HELOC babies were just renting those houses from the banks. So they must lose them. Tough fuck. People like me who saved and who have REAL MONEY to bring to the deal, will just bid on the property at dimes on the dollar and need your stupid ass to MOVE OUT.

In closing: A culture of credit does not absolve you from the personal financial responsibility to capitalize yourself.

Cool - since my wife is health-care professional and I'm a mid-to-high-level manager I guess I'm exempt from GZ's rant!

On every bottle of beer sold at Heidi's and other bars, there is a warning label. The warning label says "Use of this product can be hazardous to your income if loan rates go up"

Now whose fault is it that those people became addicted to the product because it was so cheap? Is it a non-drinkers problem to help those who did not read the warnings? Is it Heidi's problem that those who purchased the beer and wine and became addicted now cannot afford their fix?

Is it the fault of those who DID read the warning label, who DID consume the product responsibly and who walked away from the bar before becoming addicted, that those alcoholics cannot afford their fix anymore?

 

Don't blame me,
I didn't vote for a
socialist.

The story never talks about the government (makes no difference whether it is a Republican or Democratic administration) and its role or lack of a role as in oversight and regulation.

I know most of you hardcore, die hard conservatives don't much like regulation, but when greed gets in the way, when you have consumers without adequate personal finance skills (as in education) and wanting a piece of the American dream (greed again) who or how do you assure that deceptive practices and contracts are not part of the landscape. This also goes for consumers that might falsify their income and net worth. There should be rules - we can argue about the rules - but there has to be rules.

Much as we don't like the intrusion, there is a place for government. Without government there is anarchy. I can hear it now - bring on the anarchy!

And that's one of the nuttiest things about it all! The nation is blanketed by "truth-in-lending" laws. Even when a bank is blatantly prodding you to take on a larger mortgage, the TIL disclosure is RIGHT THERE for you to read, in large lettering and plain English. You could clearly see that the terms of the deal were bad for you! And people STILL signed! They signed those foul terms by the millions!

There are many actors in this little, destructive drama. All are responsible, so all can be blamed. (Note: Except us savers and renters. {bows}) And ALL can be punished. The stupid borrowers will have to be foreclosed and evicted. The stupid banks will have to write down, possibly failing and wiping out their shareholders. The stupid municipalities will have to downsize their budgets. Why aren't we willing to endure these consequences in order to fully punish the guilty?

Note well that the displaced homeDEBTors will not be homeless. There is a HUGE GLUT of domiciles in the USA; it's at its highest level since we started to record it around 1950. Displaced people can just RENT. And the average size of the American house doubled since 1980. So displaced people who can't rent can just be housed with friends and family for the interim until they CAN find a suitable rental. EXTREMELY FEW PEOPLE NEED TO BECOME HOMELESS. And NO family with children can possibly become homeless due to all the existing government welfare programs.

One case I saw on TV (I know, I know, but still..) involved an elderly retired woman who owed three mortgages on her home, all recently taken from so called predatory lenders. My question: Why borrow the money? She owned her own home. Why take out a mortgage on it when you own it?

I know several people who are complaining bitterly about the decline in home values, but they all either own their home outright or they continue to make the mortgage payments on time and figure that in 25 or 30 years they'll be in good shape. They'll own their home.

Why should these people be punished through higher taxes for mistakes they didn't make, and wouldn't have made?

Mad Jack
Mad Jack's Shack

However, there are a few observations:

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later.

Which is not the smartest decision Heidi ever made. Her 'regulars' have no income except for the public dole and have lived this way for a long time. They are alcoholics, meaning that they are addicted to the substance Heidi sells and will purchase that substance before other necessities. If Heidi has been in business for any length of time at all, she'll know that barflies are unreliable, especially when it comes time to pay up. Heidi's only advantage here is that she probably knows where these deadbeats live, and so can get her doorman Bruno to go out and do collections for her.

Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

Are you kidding? When word gets out among the local barflies that you can drink now and pay some other time, there is a stampede at the bar in Berlin that dwarfs anything in the history of the world.

Heidi increases her prices for wine and beer, the most-consumed beverages.

Which should drive customers out of Heidi's bar and into The Distillery, but it doesn't. Why? Free beer!

Her sales volume increases massively.

But her gross nor her net profit do not increase proportionate to sales. Right here is where the circus should stop, but it doesn't.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

Question: Why does Heidi borrow money? Oh yeah, that's right... everyone's drinking, but no one is paying their tab. So Heidi will need money to pay her vendors, who may not have the same childlike confidence in the ability of the unemployed alcoholics as Heidi does.

The vendors and other people decide to invest their money with the young and dynamic customer service consultant at the local bank. Big mistake.

Eventually: Heidi cannot fulfill her loan obligations and claims bankruptcy. Surprising no one who has been watching this fiasco.

Now the taxpayers get to bail everyone out.

Mad Jack
Mad Jack's Shack

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